In 1993, the United Kingdom established Pool Reinsurance Company Limited (Pool Re) as a government-backed terrorism reinsurer in response to the restrictions of cover available to UK commercial property insurers. The terrorist events in London, stemming from political turmoil in Northern Ireland in the late 1980s and early 1990s, led to restrictions in terrorism cover.

The UK government agreed to be the insurer of last resort with an unlimited cover should the assets accumulated by the program become exhausted. Reinsurance cover available in the UK from the international reinsurance market was designed to dovetail with the cover provided by Pool Re so insurers would not face a gap between the market and Pool Re.

The Pool Re program limited itself to reinsurance cover for property damage and business interruption losses arising from fire and explosion but did not provide cover against other forms of terrorist attack.

Following the events of September 11, 2001, UK insurers felt they were no longer able to provide cover to the same extent that they had previously. They began to apply exclusions for damages caused by perils other than fire and explosion, such as “cyber” risks. Concerns arose over the definition of terrorism and the broadening range of terrorist weapons. The UK Treasury recognized the need to enter into discussions to extend the scope of Pool Re to cover the full range of property damage and consequential loss perils that were being excluded in the market. In 2003, terrorism cover was extended to an “all risks” basis, but excludes acts of war.

Each member must pay losses up to a threshold, which is determined individually by member. When losses exceed that threshold, the Member can claim upon reserves accumulated by the insurance industry on a mutual basis. Under the Pool Re program, the reinsurance cover provided to Members is subject to a maximum loss retention per event per member combined with an aggregate limit. Each member’s retention is set annually in advance by Pool Re using an agreed formula based on the premium ceded by that Member. Should terrorism claims exceed these reserves, Pool Re can, in turn, draw funds from government to enable it to meet its obligations in full, regardless of the scale of losses.

Pool Re membership is optional. Lloyd’s Underwriters and any insurance company authorized to transact property insurance in the UK is eligible to become a member.

Policyholders who decide to purchase UK terrorism cover from a Pool Re member must include all the exposures eligible for cover, although it is permissible to purchase material damage cover only — without business interruption. Insurer members of the scheme cannot decline to offer terrorism cover (as defined) nor are they permitted to select which of those risks are ceded to Pool Re.

Insurer members of the scheme agree that they will offer Terrorism cover (as defined under the Scheme) to any relevant Policyholder upon request. Insurers cede all relevant terrorism exposures to Pool Re; it is not open to elect to retain selected risks for their own account.

Pricing

Although the price for cession to Pool Re is fixed by the scheme, it is for the members to determine the original policy pricing for Terrorism cover. No commission is paid to the member by Pool Re, but members can decide to pay whatever commission they feel appropriate on the original premiums and they can seek appropriate premiums to reflect their retentions.

The Member Review Process

Pool Re undertakes regular reviews with members, looking at their administration. A proactive approach is also adopted to claims management practices, with the intention of maintaining members’ awareness of their responsibilities should there be a certified event.

The Certification Process

Whenever an incident occurs that may be the result of an act of terrorism, there will be informal discussions involving the Pool Re members affected, Pool Re, and Her Majesty’s Treasury. Once the facts are known and it is established that the act in question falls within the definition, HM Treasury will issue a certificate under an agreed procedure.